Whether you are a founder of a business, an investor in a company or an employee who owns shares in a company, the shares you own can be a very valuable asset. It is, therefore, important to consider how you hold those shares to protect them and effectively manage any financial returns you receive from them. One of the most common methods of holding shares in a company is through a discretionary trust. This article will explain the advantages and disadvantages of owning shares through a trust and how to hold and transfer shares to your trust.
Owning the shares individually won’t hurt you now, but it will hurt you down the track
Owning the shares in your own name won’t hurt you initially, as there is usually no instant adverse effects of having an individual as a shareholder.
But it will hurt you in the following circumstances:
- You want to issue a dividend from retained profits
- You want to sell part or all of your business (BIG one)
- You want to restructure your family assets for asset protection or estate planning
All of these situations happen fairly regularly.
The problem is inflexibility for tax purposes.
If you sell the shares in your company – you only have potentially one individual who will pay capital gains tax on the sale.
If you issue a dividend, you are restricted to the shareholders, and cannot redirect these dividends to another taxpayer.
What is a Trust?
A trust is a legal arrangement where a trustee holds and manages assets for the benefit of the trust’s beneficiaries. A trustee can consist of one or more individuals. Alternatively, a trust can also be managed by a company. The trustee who is in charge of managing the trust, in this case, is known as a corporate trustee.
The most common type of trust which people will use to hold their shares is a discretionary trust. These are often referred to as family trusts. Discretionary trusts allow the trustee to have discretion in how they distribute trust income between the beneficiaries. Another type of trust is a ‘unit trust’, where the beneficiaries have a specific or fixed entitlement to receive trust income.
Advantages There are many reasons why it can be useful to hold your shares through a trust, including for:
- tax planning;
- tax benefits;
- ease of succession; and
- asset protection.
Tax Planning and Benefits
Generally, if you hold shares personally, any income generated from those shares, such as dividends, will be subject to income tax at your personal marginal tax rate in the income year in which the dividends were received.
By contrast, if those shares are held via a discretionary trust, the trustee can distribute income to the beneficiaries at its discretion. This means that if the trust’s beneficiaries include individuals (such as family members) taxed at a lower marginal tax rate, the trustee can distribute the income derived from the shares to those individuals. This is beneficial because it allows you to distribute income from the shares in the most tax-optimal manner.
Another advantage of discretionary trusts relates to capital gains tax (CGT). Typically, when shares are disposed of for a profit, a “CGT event” occurs, and CGT is payable on the capital gain amount. If the trust has owned the shares for at least 12 months before they are sold, a 50% CGT discount usually applies to any CGT payable due to the disposal.
It’s important to note that tax benefits are not realised by the trust itself but rather by the trust’s beneficiaries.
Ease of Succession
Additionally, trusts can be useful tools in family succession planning, as the settlor can facilitate a controlled transition of wealth to future generations.
Properly structured trusts can ensure that hereditary assets are responsibly safeguarded and professionally managed per the settlor’s wishes.
Once a trust is established, it effectively divests the settlor of direct legal ownership over the assets settled into the trust. As a result, upon the settlor’s death, there is no requirement to undergo the probate process or similar formalities to facilitate the transfer and administration of the trust’s assets. This allows for an efficient mechanism to transition the ownership interests vested in the trust to designated beneficiaries following the settlor’s passing while circumventing the delays and costs typically associated with probate proceedings.
Consequently, trusts provide an advantageous vehicle for ensuring the seamless intergenerational transfer of wealth in accordance with the settlor’s wishes.
Asset Protection
Separating legal ownership between personal and trust-held assets is a significant advantage of establishing a trust. While historically founded as vehicles to insulate assets from risks, trusts have evolved to serve the modern need of securely holding assets in politically stable jurisdictions. These sophisticated arrangements are integral to comprehensive financial and estate planning, particularly for high-net-worth individuals, multi-generational families, and corporate entities. Trusts function as robust defensive
shields, protecting the wealth from potential liabilities such as overreach from punitive tax regimes.
For instance, shares or other assets held via a trust may benefit from enhanced protection from creditors compared to those held personally. This degree of insulation is further reinforced when the trust is administered by an independent, professional corporate trustee rather than an individual. Establishing the trust effectively severs the direct legal chain between the party that created the trust (known as the “settlor”) and the assets forming part of the trust.
How NB Commercial Law can help
Our experienced commercial lawyers can provide tailored advice on the most appropriate way to hold and manage your shares. Whether you are considering setting up a trust, transferring shares to a trust, or restructuring your assets for better tax planning, succession, or asset protection, we are here to guide you every step of the way.
Contact us today to schedule a complimentary consultation and ensure your assets are managed in a way that aligns with your financial and personal goals.